Southwest Airlines 2011 Annual Report Download - page 85

Noncurrent investments consist of investments with maturities of greater than twelve months. At
December 31, 2011, these primarily consisted of the Company’s auction rate security instruments that it expects
will not be redeemed during 2012. See Note 11 for further information. Noncurrent investments are included as a
component of Other assets in the Consolidated Balance Sheet.
Accounts and other receivables
Accounts and other receivables are carried at cost. They primarily consist of amounts due from credit card
companies associated with sales of tickets for future travel, amounts due from business partners in the
Company’s frequent flyer program, and amounts due from counterparties associated with fuel derivative
instruments that have settled. The allowance for doubtful accounts was immaterial at December 31, 2011, 2010,
and 2009. In addition, the provision for doubtful accounts and write-offs for 2011, 2010, and 2009 were each
immaterial.
Inventories
Inventories consist primarily of aircraft fuel, flight equipment expendable parts, materials, and supplies.
All of these items are carried at average cost, less an allowance for obsolescence. These items are generally
charged to expense when issued for use. The reserve for obsolescence was immaterial at December 31, 2011,
2010, and 2009. In addition, the Company’s provision for obsolescence and write-offs for 2011, 2010, and 2009
were each immaterial.
Property and equipment
Property and equipment is stated at cost. Depreciation is provided by the straight-line method to estimated
residual values over periods generally ranging from 23 to 30 years for flight equipment and 5 to 30 years for
ground property and equipment once the asset is placed in service. Residual values estimated for aircraft
generally range from 5 to 15 percent and for ground property and equipment generally range from 0 to 10
percent. Property under capital leases and related obligations are initially recorded at an amount equal to the
present value of future minimum lease payments computed on the basis of the Company’s incremental borrowing
rate or, when known, the interest rate implicit in the lease. Amortization of property under capital leases is on a
straight-line basis over the lease term and is included in Depreciation and amortization expense. Leasehold
improvements generally are amortized on a straight-line basis over the shorter of the estimated useful life of the
improvement or the remaining term of the lease.
The Company evaluates its long-lived assets used in operations for impairment when events and
circumstances indicate that the undiscounted cash flows to be generated by that asset are less than the carrying
amounts of the asset and may not be recoverable. Factors that would indicate potential impairment include, but
are not limited to, significant decreases in the market value of the long-lived asset(s), a significant change in the
long-lived asset’s physical condition, and operating or cash flow losses associated with the use of the long-lived
asset. If an asset is deemed to be impaired, an impairment loss is recorded for the excess of the asset book value
in relation to its estimated fair value.
Aircraft and engine maintenance
The cost of scheduled inspections and repairs and routine maintenance costs for all aircraft and engines are
charged to Maintenance materials and repairs expense as incurred. The Company has “power-by-the-hour”
agreements related to its Boeing 737-700 engines and AirTran’s Boeing 717-200 engines with external service
providers. Under these agreements, which the Company has determined effectively transfer the risk associated
with the maintenance on such engines to the counterparty, expense is recorded commensurate with each hour
flown on an engine. The Company modified its engine maintenance contract for its Classic fleet (737-300/500s)
during fourth quarter 2011 and although payments made under this contract are made under a
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